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July 01, 2017

The proposed Nord Stream 2 pipeline could destabilise European energy cooperation and offer Gazprom excessive influence in Central and Eastern Europe. These disadvantages do not justify the commercial benefits for German companies.

The construction of a new pipeline under the Baltic Sea between Russia and Germany throws up a series of economic, legal and political questions. German politicians face a particular dilemma. The project seems likely to be profitable for Germany itself, but it would worsen the gas supply for Germany’s eastern neighbours. The strategic opportunities that Nord Stream gives Gazprom are particularly worrying. It would make it possible for Gazprom to improve its market position in north-west Europe, offering lower prices to compete against liquid natural gas (LNG) and western European production, while pushing through higher prices to the East.

At the moment Russian natural gas has to flow through eastern Europe to reach western Europe. But with Nord Stream 2 Gazprom would be able to bring large quantities to market in north-west Europe directly through Germany. German traders would, of course, try to buy this gas at low prices and sell it at a higher price further East. But the relevant pipeline capacity in a West-East direction is limited.

With Gazprom directly supplying large quantities of gas to the west European markets, avoiding eastern Europe, the existing West-East capacity would quickly be exhausted. This would make it impossible to deliver any more gas from north-western countries to the South-East of Europe. This way Gazprom would have an essentially captive market in south-eastern countries, with a significant demand for natural gas. This would not only mean higher prices in Central and Eastern Europe. It would also allow Gazprom to turn off the gas tap for these countries, without breaking its commitments to western European countries.

So, Nord Stream 2 looks like a project where Gazprom and the German gas industry do well at the expense of other central and eastern Europeans. This undertaking might be profitable for the participating companies, but the effects for the EU as a whole could be negative. What is more, there could also be political consequences if Gazprom achieves unfettered power on the markets in parts of eastern Europe. Especially for Ukraine, the need to negotiate gas provision directly with Moscow again could have consequences that go far beyond commercial disadvantages. Nord Stream 2 could seriously endanger the energy security and geopolitical situation of Ukraine.

Nord Stream 2 will also not make it any easier to convince countries like Poland or Slovakia of the advantages of a common European energy policy. But Germany needs this cooperation. If central and eastern European countries walk away from the fight against climate change, this could slow down the entire European energy transition. The cost of energy in Germany would also increase if it were not possible to sell excess energy to neighbours and use their electricity networks. Nord Stream 2 will lead to reduced revenues and high gas acquisition costs in Germany’s partner countries to the East. And this would make cooperation on energy issues within the EU more difficult. That is not in the German interest. Thus, in balance, the long-term disadvantages of building Nord Stream 2 outweigh the short-term commercial advantages

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